1. The Montana Hills Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital of 11%, and permanent debt with both a book and face value of $12,000. The debt has an annual 8% coupon. The tax rate is 34%. What is the value of the firm?
a. $48,600
b. $50,000
c. $52,680
d. $56,667
e. $60,600
2. The reason that MM Proposition I does not hold in the presence of corporate taxation is because:
a. Levered firms pay more taxes compared with identical unlevered firms.
b. Bondholders require higher rates of return compared with stockholders.
c. Earnings per share are no longer relevant with taxes.
d. Dividends are no longer relevant with taxes.
e. None of the other answers.